FDIC Reports Positive Banking System Data
While the FDIC's headlines touted the positive developments, I dug deeper into the data to gauge whether or not the banking system has emerged from the great credit crunch which began at the end of 2007.
My analysis of what I believe are key metrics found in the QBP indicates while progress has been made to unwind the great credit crunch, problem assets remain on the books of our nation's banks.
According to the report, FDIC-insured financial institutions generated $37.6 billion in net income in the third quarter, a sequential increase of 6.6% to the highest level since the third quarter of 2006. However, improved income continues to be buoyed by the reduction of loan loss provisions and rising noninterest income, not by a significant increase in interest income from new loan issuance, as tight credit standards continue.
Below the surface, noncurrent loans continued to decline but the pace slowed to a decline of just $100 million (0.03%), the smallest in the past 10 quarters.
Bank failures fell to the lowest levels since the end of 2008 with only 12 banks shuttered in the quarter. Mergers absorbed another 49 insured institutions. As a result the FDIC's list of problem banks fell from 732 to 694, still quite elevated. In my judgment the FDIC is allowing banks that should be closed to stay open as zombie banks.
The table shows key line items from the FDIC Quarterly Banking Profile comparing data from the end of 2007 versus Q3 2012.
Number of Banks : The number of FDIC-insured financial institutions declined by 1,353 to 7,181 since the end of 2007, down 15.9%. Only 464 of this net reduction (34.3%) was via the bank failure process.
Total Assets : Despite the great credit crunch, total assets in the banking system increased 9.1% to $14.2 trillion since the end of 2007.
Residential Mortgages (1- to 4-Family Homes) : These are mortgage loans on the books of the banks. Since the end of 2007 this asset class is down $355.4 billion, or 15.8% to $1.89 trillion.
Nonfarm/Nonresidential Real Estate Loans : This category is a portion of what's known as commercial real estate loans (CRE). This category has not suffered the fate of other real estate loan categories with a rise of 9.3% since the end of 2007 to $1.06 trillion.
Construction and Development Loans : This category has been the Achilles Heel of the banking system. These are loans to developers and home builders where a significant number of loans became noncurrent. With write-downs and asset sales this category is down 66.5% since the end of 2007, but remains elevated at $210.4 billion. Compare this to the crunch of the S&L crisis. At the end of 1988 C&D loans stood at $216.6 billion. At the end of 1992 C&D loans were down 54.7% to $98.1 billion.